computer sciences AR 03

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computer sciences AR 03

  1. 1. 2OO3 ANNUAL REPORT COMPUTER SCIENCES CORPORATION E XPERIE NCE ■ R E S U LT S
  2. 2. 2003 ANNUAL REPORT COMPUTER SCIENCES CORPORATION FINANCIAL HIGHLIGHTS FISCAL YEAR ENDED Dollars in millions, March 28, 2003 March 29, 2002 March 30, 2001 except per share amounts Revenues $11,346 $11,379 $10,493 Income before taxes* 612 497 330 Net income* 440 344 233 Earnings per share (diluted)* 2.54 2.01 1.37 Stockholders’ equity 4,606 3,624 3,215 Total assets 10,433 8,611 8,175 Book value per share 24.66 21.17 19.06 Number of employees 90,000 67,000 68,000 * Fiscal 2003 and 2001 operating results above include special items. A discussion of “Special Items,” “Income Before Taxes,” and “Net Income and Earnings per Share” is included on pages 14 -16 of this annual report. Computer Sciences Corporation’s fiscal year ends the Friday closest to March 31. TABLE OF CONTENTS Financial Highlights Introduction 1 Letter To Shareholders 2 Experience 4 Results 6 CSC Revenues 8 Financial Section 9 Principal Operating Units 63 Directors and Officers 64 Shareholder Information 65
  3. 3. EXPERIENCE TAKES YEARS TO ACCRUE. AND THOUSANDS OF LESSONS LEARNED, REFINED AND APPLIED. IT RECOGNIZES OPPORTUNITIES AND PITFALLS . . . AND ACTS WITH SPEED AND CONFIDENCE. EXPERIENCE IS KNOWING WHAT TO DO. AND WHAT NOT TO DO. IT’S GLEANED FROM MAKING INNOVATION ACTUALLY WORK. AND TO DELIVER BUSINESS RESULTS THROUGH THE USE OF INFORMATION TECHNOLOGY, THERE’S NO SUBSTITUTE FOR IT. E XP E R I E N C E . R E S U LT S .
  4. 4. TO OUR SHAREHOLDERS more than 100 years of experience. CSC now ranks among Fiscal 2003 was a solid year for CSC. I am pleased the top five IT services providers to the government. to report that we saw increased earnings and steady improvement. Additional noteworthy developments during fiscal 2003 included these major awards: a $700 million agreement Net income for the year was $440.2 million, revenues to provide global outsourcing services for Bombardier remained steady at $11.3 billion, and nearly 80% of Transportation and a 10-year, $560 million IT outsourc- revenues were derived from multi-year agreements. ing agreement with Dun & Bradstreet. Key U.S. federal Major new business wins totaled $7.7 billion in value. signings included new awards with the Department of State, the Environmental Protection Agency, and the Fiscal 2003 marked another year in which CSC delivered U.S. Army Communications and Electronics Command. sound results. This is due, in part, to actions the company We also extended large agreements with Raytheon took in fiscal 2001 to increase efficiency and productivity, to and United Technologies Corp. on the commercial reduce discretionary expenses and manage risk, to balance side and NASA and the Centers for Disease Control resources with demand, and to improve our performance. in the federal sector. CSC’s success is also due to the company’s unique ability On the technology front, we continued to build upon to focus resources quickly on areas that hold new our many years of industry experience and expertise. We opportunities for significant growth. An example is the worked with NASA to install one of the world’s largest U.S. federal government, with its increased requirements supercomputers and developed a number of innovative for less costly and improved service to citizens, as well solutions for vertical industries, such as software that as more effective security and information assurance, helps financial services firms comply with new regulations. especially in the area of Homeland Security. We also reaffirmed CSC’s position as an industry leader in the fight against cyberterrorism and created a federal To better address the opportunities these requirements sector division to meet growing Homeland Security needs. create, CSC set a goal to increase the portion of total CSC’s Enforcement, Security and Intelligence organization revenues that it generates from the U.S. federal govern- won $202 million in new awards within three months ment. CSC achieved that goal with the March 2003 of its creation. acquisition of DynCorp. In fiscal 2003, CSC’s revenues from the government exceeded $3 billion for the first In April, Mike Laphen was elected the company’s time. U.S. federal revenues comprised 29% of our new president and chief operating officer, replacing total revenue. Edward “Pete” Boykin, who is retiring. Mike has been with CSC since 1977, most recently serving as president Founded in 1946, DynCorp has been a leading provider of CSC’s European Group. Pete provided CSC with 37 of security, wireless technology, logistics support, base years of dedicated and outstanding service, for which management and aviation services to the government. I am deeply grateful. With DynCorp, CSC has access to virtually every depart- ment and agency in the government. CSC now offers a More than ever, clients worldwide seek better-defined much broader set of capabilities and solutions, and we business return from their IT investments. They want now have more than 40,000 professionals dedicated to more than technology – they demand business results. government work. Combined, the two companies have EXPERI E NC E. 2
  5. 5. CSC believes these results can be best delivered by total • A $450 million, 10-year agreement to provide IT solutions that impact high-value business processes, outsourcing for ISS A/S, a global leader in facility leverage existing systems and investments, and enable services based in Denmark. continuous improvement. CSC’s processes, products, methodologies, tools, training and infrastructure, and In just the first two months of the new fiscal year, CSC the skills and values of our people – in a word, CSC’s has won more than half as much new award value as experience – is exactly in developing and deploying in all of fiscal 2003. Further, our opportunities for awards such solutions, at scale and for industrial-strength produc- with the U.S. federal government now stand at nearly tion environments. $38 billion to be awarded over the next 34 months. The breadth and scope of those business opportunities CSC ended the fiscal year on a high note. In March, we have never been larger. announced a 10-year, $1.6 billion global IT infrastructure outsourcing agreement with Motorola, a leading telecom- CSC ended the year a different company from the munications and electronics company. CSC will manage one it was at the beginning of the year. We now Motorola’s global midrange, desktop and distributed have approximately 90,000 capable employees in 76 computing infrastructure, its network infrastructure, and countries who are our most valuable asset and are up its global help-desk operations. to the task of delivering results to our clients. We are better positioned than we have ever been to address Fiscal 2004 is off to a very strong start. Notable announce- significant opportunities in government and commercial ments in the first two months of the year include: markets worldwide. • A 10-year, $2.4 billion agreement awarded to the In the constantly-changing environment of information CSC-led Prism Alliance to provide IT outsourcing technology, some things remain constant: our dedication for the Royal Mail Group, a government-owned to clients, our ethics, our focus on practical innovation, public limited company our drive to deliver business results. These are the in the United Kingdom. immutables, the qualities that define us. They are the sum of our experience. We will use this experience – • A 10-year, $948 million as we always have – to continue to deliver operational agreement to provide facilities and financial results to our clients and value to our management and range shareholders. operations for the British Ministry of Defence, which Sincerely, was awarded to a DynCorp International joint venture. • A $735 million agreement Van B. Honeycutt to manage Marconi Corporation’s worldwide IT Chairman and Chief Executive Officer infrastructure for 10 years. Marconi is a global provider of telecommunications equipment, services June 5, 2003 and solutions. R E S U LT S . 3
  6. 6. E XPER IE NCE E XPE RI E NCE HOW DO YOU MEASURE EXPERIENCE? HERE ARE A NUMBER OF WAYS… 90,000: 13,035: number of CSC employees worldwide number of computers, data and voice circuits relocated by CSC to midtown 22: number of years of work experience the average from Wall Street for global financial services CSC employee possesses client following September 11th 76: number of countries where CSC serves clients 2: number of days it took to complete entire relocation 34: number of languages in which CSC conducts business worldwide 10,061,558: number of help desk calls CSC answered last year 15: number of industries CSC serves 221: number of Fortune 500 companies for which CSC has done work in the past 10 years 657: number of government agencies, worldwide, that CSC has served in the past 10 years 853,924,175: number of miles Space Shuttles have traveled with support from CSC 35: percentage of CSC workforce who joined the company via outsourcing 51: percentage of CSC top management 5,200: number of financial institutions worldwide who worked in executive positions for global that use CSC software Fortune 500 companies before joining CSC 19: number of CSC Global Centers of Excellence EXPERI E NC E. 4
  7. 7. 100 : The number of years of combined experience CSC and DynCorp have serving U.S. federal clients 5: CSC has long been regarded as a leading provider number of CSC operations that have attained of IT services to the U.S. federal market and in the Software Engineering Institute’s coveted fiscal year 2003, our leadership position grew Software Capability Maturity Model Level 5 rating even stronger. 100: percentage of CSC data and network In March, CSC acquired DynCorp, a large provider operation facilities ISO 9000 compliant of services to the U.S. federal government with more than 26,000 talented employees working 101: number of full-time ethical hackers at some 550 locations throughout the world. employed by CSC DynCorp was founded in 1946, and like CSC, the company enjoys a long history of dedicated 1,016: number of information security experts service to the government. employed by CSC DynCorp provides systems and network integration 4,500,000,000: services, high-tech range operations, global defense estimated number of lines logistics and maintenance services and contingency of code CSC maintains for clients today support, homeland security services, and critical 30,100: infrastructure management services to defense, number of security and civil agencies. application professionals employed by CSC The two companies’ services and clients are complementary, allowing CSC to deliver a greater 1968: year the first breadth of end-to-end solutions to an even broader IT services firm was listed range of agencies. on the New York Stock CSC’s abilities to address the needs of the new Exchange (Yes, it was CSC) Department of Homeland Security and to respond to the federal government’s initiative to increase 44: number of years its reliance on service providers are especially clients have trusted CSC strengthened. CSC also increases its presence in to meet their information federal agencies such as the Department of State, technology needs Department of Justice and Department of Energy. CSC now has more than 40,000 employees dedicated to one of the largest and faster-growing markets for IT services. R E S U LT S . 5
  8. 8. RE SU LT S R E S U LT S FOR CSC, RESULTS MEANS HELPING CUSTOMERS ACHIEVE THEIR STRATEGIC GOALS AND PROFIT FROM THE USE OF INFORMATION TECHNOLOGY. 31% That’s the amount of savings in annual IT infrastruc- ture and application support costs CSC helped attain for a services company in the United Kingdom. As part of a long-term outsourcing, systems integra- tion, and consulting agreement, CSC helped the firm streamline services and introduce new software applications. CSC also helped the company expand business opportunities into new markets. Two Years to One Month CSC forensics examiners reduced a government agency’s computer forensics backlog from two years to one month, despite an increase in caseload. In addition, CSC forensics examiners uncovered computer evidentiary media that led to the seizure of a national network engaged in the distribution of illegal drugs. 2.5 Times CSC helped to develop and maintains an innovative Knowledge Based Engineering (KBE) design environ- ment with a major aerospace company. Results? A large-scale design process that, on average, is 2.5 times more efficient than its predecessor. EXPERI E NC E. 6
  9. 9. offer its dealer network a real-time ordering option, and eliminate one warehouse – saving the client For certain processes, improvements of over 40 more than 4 million euros annually. Delivery time times were achieved. CSC’s role in the project dropped from five days to three, as well. was recognized as world-class by the Management $9 Million Consultancies Association. CSC’s innovative use of artificial intelligence helped Three Person Years a financial services company save more than $9 Working with a U.S. government agency, CSC devel- million a year on claims costs. The CSC-developed oped a Web-based ordering tool that dramatically insurance claims solution has delivered faster and cut the cost of procuring services. Featuring an more consistent claims processing to the client over intelligent agent, the tool decreases tedious manual a number of years. Improved reporting, easier labor required to validate service orders and has identification of problems and more efficient training sharply reduced the number of erroneous orders. are among other benefits achieved. Results? Improved productivity, better quality and lower expenditures. One estimate is that CSC has helped the agency save up to three staff-years of effort – annually. From 5 Days to 3 CSC partnered with a major French automotive group to implement a new SAP-based information system as part of the reorganization of its spare 66% Faster parts supply chain. As a result, the automotive client CSC developed a logistics system for a national was able to greatly improve supply-chain efficiencies, postal service in Europe that transformed a large portion of the operation into a paperless office. Among other benefits, the system provided improved customer relationships and faster access to information. With the new system in place, the time it takes to collect data for strategic management decisions has decreased by 66%. R E S U LT S . 7
  10. 10. REVENUE S RE VE N U E S REVENUES BY MARKET SECTOR ($ IN BILLIONS) % of Total Fiscal Fiscal Fiscal Fiscal FISCAL 2003 2003 2002 2003 2002 U.S. Commercial $ 3.9 $ 4.3 34% 38% Europe 3.0 2.9 26 26 Other International 1.1 1.3 11 11 Global Commercial 8.0 8.5 71 75 Department of Defense 1.9 1.8 17 16 Civil Agencies 1.4 1.1 12 9 FISCAL 2002 U.S. Federal Government 3.3 2.9 29 25 $11.3 $11.4 100% 100% REVENUES BY BUSINESS SERVICE* ($ IN BILLIONS) % of Total Fiscal Fiscal Fiscal Fiscal 2003 2002 2003 2002 FISCAL 2003 Outsourcing U.S. Federal Sector $ 0.7 $ 0.4 6% 3% Global Commercial 5.3 5.4 47 48 Total Outsourcing 6.0 5.8 53 51 IT & Professional Services U.S. Federal Sector 2.6 2.5 23 22 Global Commercial 2.7 3.1 24 27 FISCAL 2002 Total IT & Professional Services 5.3 5.6 47 49 $11.3 $11.4 100% 100% * Based on CSC estimates EXPERI E NC E. 8
  11. 11. FINANCIAL F I NANCIAL CONTENTS 10 Management’s Discussion and Analysis 25 Consolidated Statements of Income 26 Consolidated Balance Sheets 28 Consolidated Statements of Cash Flows 29 Consolidated Statements of Stockholders’ Equity 30 Notes to Consolidated Financial Statements 59 Independent Auditors’ Report 60 Quarterly Financial Information (Unaudited) 61 Five-Year Review R E S U LT S .
  12. 12. MANAGEMENT’S DISCUSSION AND ANALYSIS COMPUTER SCIENCES CORPORATION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS BUSINESS ENVIRONMENT The Company’s service and product offerings include information technology services including consulting and systems integration services, outsourcing, and other professional services. CSC provides these services to customers in the global commercial and U.S. federal markets. On a geographic basis, CSC provides services to global commercial customers in the United States, Europe, and Other International locations. Australia, Asia and Canada generate substantially all revenue within Other International. During fiscal 2003, the information technology services industry experienced a reduction in global demand for commercial project-oriented activities as customers reduced discretionary spending in response to the economic environment. Based on current indicators, the Company anticipates stabilization of U.S. market demand for consulting and systems integration services, but expects continued pressure on demand for such services in European and Other International markets. While the future demand for outsourcing services is unknown, the long-term nature of major outsourcing engagements allows outsourcing providers to benefit from a certain level of continuity. The U.S. federal government is one of the world’s largest information technology services customers. The U.S. federal and public sector information technology spending are expected to increase in calendar 2003 in order to improve technologies in the areas of defense, homeland security, civil agency modernization, and education. While the ultimate distribution of U.S. federal funds and project assignments remain uncertain, the Company expects its information technologies and outsourcing capabilities, including the skill set acquired with DynCorp, to be viewed favorably by the U.S. federal government. During fiscal 2003, the Company’s Global Commercial segment benefited from currency fluctuations in Europe and Other International regions as discussed below. The Company cannot forecast future movement in currency exchange rates or its impact on operating results. REVENUES Revenues for the Global Commercial and U.S. Federal sector segments (see Note 12) for fiscal 2003, fiscal 2002 and fiscal 2001 are as follows: F i s c a l Ye a r 2003 2002 2001 Percent Percent Dollars in millions Amount Change Amount Change Amount U.S. Commercial $ 3,868.2 (10%) $ 4,307.5 5% $ 4,106.5 Europe 2,981.2 2 2,934.2 14 2,583.6 Other International 1,151.6 (9) 1,264.0 4 1,216.0 Global Commercial 8,001.0 (6) 8,505.7 8 7,906.1 U.S. Federal Sector 3,347.4 17 2,873.3 11 2,586.7 Corporate (1.9) .2 .1 $11,346.5 0 $11,379.2 8 $10,492.9 Total EXPERI E NC E. 10
  13. 13. COMPUTER SCIENCES CORPORATION The Company’s overall revenue declined by $32.7 million for fiscal 2003 from fiscal 2002. Declines in Global Commercial segment revenues were substantially offset by the U.S. Federal sector’s 17% revenue growth. The Company announced $7.7 billion in new business awards during fiscal 2003 compared with $11.4 billion and $10.9 billion announced for fiscal 2002 and fiscal 2001, respectively. Global Commercial revenue declined 6%, or $504.8 million, during fiscal 2003. In constant currency, Global Commercial revenue declined approximately 10%. The Company announced $5.0 billion in new Global Commercial business awards during fiscal 2003 compared with the $3.6 billion announced during fiscal 2002 and $8.2 billion announced during fiscal 2001. For fiscal 2003, U.S. Commercial revenue declined by 10%, or $439.3 million. Approximately one-third of this decline is attributable to reduced demand for consulting and systems integration services. Substantially the entire consulting and systems integration decline occurred in the first and second quarters of fiscal 2003 with stabilization in demand taking place in the third and fourth quarters of fiscal 2003. The balance of the U.S. Commercial revenue decline is attributable to expiration of outsourcing contracts and client reductions in billable volumes and discretionary projects, partially offset by over $170.0 million in new outsourcing engagements. For fiscal 2002, U.S. Commercial revenue grew 5%, or $201.0 million. This growth was principally generated by outsourcing engagements including additional activities on the Nortel Networks, BAE Systems, General Dynamics and J.P. Morgan Chase & Co. contracts and further expansion in the Company’s financial services vertical markets including the benefit associated with the fiscal 2001 acquisition of Mynd Corporation (Mynd). Revenue growth was impacted by a significant decrease in consulting and systems integration revenue. The Company’s European operations generated fiscal 2003 growth of 2%, or $47 million. Outsourcing revenue growth of approximately 10% was substantially offset by a revenue decline in consulting and systems integration services including the financial services vertical market. Sources of outsourcing revenue growth included BAE Systems, Nortel Networks, British Nuclear Fuels Limited, and Whitbread accounts and the impact of new business including Bombardier, United Kingdom Department of Health, and Allders. Currency fluctuations favorably impacted European revenue by approximately 10% points. For fiscal 2002 compared to 2001, the Company’s European operations generated growth of 14%, or $350.6 million. In constant currency, European revenue growth was approximately 17%. The growth was mainly attributable to outsourcing services in the United Kingdom including additional activities associated with automotive services, Australian Mutual Provident (AMP), BAE Systems and Schroders Bank. Other International revenue declined by 9%, or $112.4 million, during fiscal 2003. The decline was primarily attributable to reduced product sales and related services reflecting the economic downturn in Asian markets. Currency fluctuations in Australia and Asia favorably impacted Other International revenue growth by approximately 5% points. For fiscal 2002, Other International operations provided revenue growth of 4%, or $48.0 million. In constant currency, Other International growth was approximately 10%. The growth was primarily attributable to expansion from outsourcing contracts including activities associated with Nortel Networks and a new outsourcing contract with the Northern Territory Government in Australia. Other International revenue growth was unfavorably impacted by reduced demand for services in Asia due to weakness in the Asian economies. R E S U LT S . 11
  14. 14. COMPUTER SCIENCES CORPORATION The Company’s U.S. Federal sector revenues were derived from the following sources: F i s c a l Ye a r 2003 2002 2001 Percent Percent Amount Change Amount Change Amount Dollars in millions Department of Defense $1,904.9 8% $1,769.0 10% $1,607.1 Civil agencies 1,364.4 34 1,019.7 14 898.0 Other 78.1 (8) 84.6 4 81.6 Total U.S. Federal sector $3,347.4 17 $2,873.3 11 $2,586.7 Revenues from the U.S. Federal sector increased 17% during fiscal 2003 versus fiscal 2002. The contribution of former DynCorp operations from the date of acquisition, March 7, 2003 to March 28, 2003 accounted for $166.0 million or approximately 6% of U.S. Federal sector’s revenue growth. The remaining revenue growth of 11%, or $308.1 million, is principally attributable to new and increased work related to intelligence community activities, the Internal Revenue Service (IRS) Prime contract, General Services Administration contracts, and an Immigration and Naturalization Service contract. Revenues for fiscal 2002 compared with fiscal 2001 increased 11%. The increase was principally related to new and increased work related to intelligence community activities, the Army Logistics Modernization contract (LOGMOD), the IRS Prime contract and several other task order activities on both Civil agency and Department of Defense (DoD) contracts. During fiscal 2003, CSC announced federal contract awards with a total value of $2.7 billion, compared with the $7.8 billion and $2.7 billion announced during fiscal 2002 and fiscal 2001, respectively. Federal contract awards for fiscal 2002 included a single intelligence community award with an anticipated value of $5.0 billion. During the third quarter of fiscal 2003, the Securities and Exchange Commission staff indicated the guidance in Emerging Issues Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” should be applied broadly to all forms of consideration provided by a vendor to its customer, and all arrangements in which an entity pays cash or other forms of consideration to its customers. Accordingly, such consideration is now accounted for as a reduction of revenue. The Company acquires information technology assets from outsourcing clients at negotiated prices and subsequently records the assets at their fair values. Any excess paid over the fair value amounts (the premium) is included in outsourcing contract costs and amortized over the contract life. In accordance with EITF Issue No. 01-09, amortization of premiums has been reclassified from costs and expenses to a reduction of revenue beginning in the third quarter of fiscal 2003. Prior period amounts have been classified to conform to current year presentation. These amounts reduced revenues and total costs and expenses by less than 1%, with no impact on income. EXPERI E NC E. 12
  15. 15. COMPUTER SCIENCES CORPORATION COSTS AND EXPENSES The Company’s costs and expenses were as follows: Dollar Amount Percentage of Revenue 2003 2002 2001 2003 2002 2001 Dollars in millions Costs of services $ 9,068.2 $ 9,187.2 $ 8,406.8 79.9% 80.7% 80.1% Selling, general and administrative 716.9 741.9 814.9 6.3 6.5 7.8 Depreciation and amortization 810.3 810.8 618.2 7.1 7.1 5.9 Interest expense, net 134.3 142.5 89.8 1.2 1.3 .9 Special items 5.2 232.9 2.2 $10,734.9 $10,882.4 $10,162.6 94.5% 95.6% 96.9% Total COSTS OF SERVICES For fiscal 2003, the Company’s costs of services as a percentage of revenue decreased to 79.9% from 80.7%. Performance improvements in our U.S. outsourcing operations resulting from cost containment efforts, consolidation of regional and back office functions in multiple geographies, and use of less costly offshore sites contributed 1.2% points of improvement. Performance improvements in our U.S. Federal sector, U.S. consulting and systems integra- tion, and Other International operations contributed equally to .6% points of improvement. Europe operations caused a .6% point adverse shift, primarily due to revenue shortfalls resulting from soft I/T project demand. Shifts in the mix of our business toward federal operations, which carry a higher ratio of costs of services, caused an adverse movement of .4% points. The Company’s costs of services as a percentage of revenue increased to 80.7% from 80.1% for fiscal 2002 compared to fiscal 2001. The change was primarily related to a decrease in demand for commercial consulting and systems integration services, which decreased utilization and impacted revenue realization. The Company also experienced cost pressure on certain outsourcing contracts. During the third quarter of fiscal 2003, the Company reclassified the provision for doubtful accounts from costs of services to selling, general and administrative. Prior period amounts have been adjusted to conform to current year presentation. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative (SG&A) expenses as a percentage of revenue declined to 6.3% from 6.5% for fiscal 2003 versus fiscal 2002. The reduction in SG&A is attributable to a $14.2 million decrease in provision for doubtful accounts and European performance improvements of approximately $29.0 million partially offset by U.S. Commercial and Other International performance decline. The favorable impact of a shift in the Company’s business mix towards the U.S. Federal sector, where SG&A costs are lower as a percentage of revenue than the Company’s composite, substantially offset a decline in the U.S. Federal sector’s performance in SG&A. Selling, general and administrative expenses as a percentage of revenue declined to 6.5% from 7.8% for fiscal 2002 versus fiscal 2001. The decrease was due to the Company’s continued cost reduction initiatives, management’s focus on discretionary costs and consolidation of certain back office services. During the year, the Company realigned certain functions in its U.S. healthcare operations with similar functions into other groups and integrated its Pinnacle Alliance unit into the financial services vertical operations. The majority of the increase in the provision related to customer credit risks associated with certain parties for whom the Company provided systems integration and consulting professional services. R E S U LT S . 13
  16. 16. COMPUTER SCIENCES CORPORATION DEPRECIATION AND AMORTIZATION The Company’s fiscal 2003 depreciation and amortization expense as a percentage of revenue was virtually unchanged compared to fiscal 2002. Last year’s depreciation and amortization expense included $77.7 million related to goodwill and employee workforce amortization which is no longer amortized as a result of the Company’s adoption of Statement of Financial Accounting Standards (SFAS) No. 142 on March 30, 2002. An approximate .7% point improvement in depreciation and amortization as a percentage of revenue from the absence of amortization of goodwill and employee workforce acquired was offset by depreciation related to additional investments during fiscal 2003 and fiscal 2002 in equipment and contract costs in support of our outsourcing clients. Depreciation and amortization expense as a percentage of revenue increased to 7.1% from 5.9% for fiscal 2002 versus fiscal 2001. The increase was due primarily to the additional depreciation and amortization of assets associated with the Company’s increased outsourcing activities and increased goodwill amortization related to the December 2000 acquisition of Mynd. INTEREST EXPENSE The $8.2 million decrease in interest expense for fiscal 2003 net of interest income resulted from a lower average outstanding debt partially offset by a higher average interest rate and decreased interest income. The increase of $52.7 million for fiscal 2002 resulted principally from the increased debt associated with funding the Mynd acquisition and purchases related to outsourcing activities. SPECIAL ITEMS In connection with the DynCorp acquisition in March 2003, the Company reviewed its operations, product strategies and the carrying value of its assets to identify any potential exit or disposal activities. As a result, during the fourth quarter ended March 28, 2003, special items of $5.2 million ($3.3 million after tax) or 2 cents per share (diluted) were recorded. The special items related to software associated with prior CSC operations now redundant to similar assets acquired with DynCorp. In addition, certain identified equipment can no longer accommodate the larger, integrated U.S. Federal sector business, and its use will be discontinued during the first two quarters of fiscal 2004, which will result in an estimated charge of $22.0 million. The Company anticipates completing the exit and disposal activities related to the DynCorp acquisition by the end of the second quarter of fiscal 2004. During fiscal 2002, the Company reviewed its estimates related to the fiscal 2001 special charge (discussion below) and made certain adjustments. These adjustments increased the facilities consolidation provision by $4 million to $29.6 million. This adjustment was offset by a decrease of $3 million related to the phased-out operations and other assets provisions and by a decrease of $1 million related to employee severance costs. These adjustments resulted in total special charges related to phased-out operations and other assets of $17.9 million. The decrease in employee severance costs was due to 109 fewer U.S. employee involuntary terminations. As a result of renegotiations of certain international employee severance agreements, the Company involuntarily terminated an additional 285 international employees. The net impact was an additional 176 employees involuntarily terminated and a $1 million reduction related to employee severance costs. As a result of these actions, there was no net additional special charge recorded during fiscal 2002. EXPERI E NC E. 14
  17. 17. COMPUTER SCIENCES CORPORATION During fiscal 2001, special items of $232.9 million ($156.0 million after tax) were recorded as detailed below. In response to a changing mix of information technology services, business conditions and overall demand for consulting and systems integration services, the Company reviewed its global operations. As a result of this review, a special item of $137.5 million ($91.3 million after tax) or 54 cents per share (diluted) was recorded during the fourth quarter ended March 30, 2001. Included in the charge was employee severance costs of $67.9 million, write-offs in connection with consolidation of facilities of $25.6 million, write-off of capitalized software and computer-related assets of $22.1 million and $20.9 million related to phased-out operations and other assets. The involuntary termi- nation benefits accrued and expensed of $67.9 million related to 1,896 employees of which 722 were U.S. employees and 1,174 were international employees. As of March 28, 2003, all involuntary termination benefits have been paid and all affected employees have been terminated. Less than $5 million of accrued costs related to consolidation of facilities remained at March 28, 2003. In connection with the December 2000 acquisition of Mynd, the Company reviewed its global commercial financial services operations, product strategies and the carrying value of its assets. As a result, special items were recorded in the third and fourth quarters of fiscal 2001. During the third quarter ended December 29, 2000, special items of $84.2 million ($57.3 million after tax), or 34 cents per share (diluted) were recorded and included, $58.2 million related to non-cash adjustments to the carrying value of capitalized software and the write-off of other assets and intangibles and $9.4 million related to a legal settlement and write-off of assets from operations previously sold or phased-out. The third quarter charge also included $16.6 million accrued for employee severance costs. In the fourth quarter, the amount for employee severance costs was adjusted to $14.5 million. The employee severance costs related to 628 global commercial financial services employees. All of the severance payments have been made and all of the employees have been involuntarily terminated. Upon completion of the integration of Mynd during the fourth quarter ended March 30, 2001, the Company recorded an additional special item of $11.2 million ($7.4 million after tax) or 4 cents per share (diluted) for the write-off of capitalized software and a provision for consolidation of facilities. The $11.2 million was the net special item after the severance adjustment described above. INCOME BEFORE TAXES The Company’s income before taxes and margin for the most recent three fiscal years is as follows: Dollar Amount Margin 2003 2002 2001 2003 2002 2001 Dollars in millions Income before taxes $611.6 $496.8 $330.3 5.4% 4.4% 3.1% During fiscal 2003, income before taxes as a percentage of revenue increased to 5.4%. Included in fiscal 2002 income before taxes is a .7%, or $77.7 million, impact of amortization of goodwill and employee workforce acquired which are no longer amortized. The remaining increase relates to improved performance in costs of services and selling, general and administrative costs offset by increases in other depreciation and amortization as described above. Income before taxes and margin for fiscal 2003 include special items of $5.2 million described above in caption “Special Items.” R E S U LT S . 15
  18. 18. COMPUTER SCIENCES CORPORATION TAXES The provision for income taxes as a percentage of pre-tax earnings was 28.0%, 30.7% and 29.4% for the three years ended March 28, 2003. The decrease of 2.7% points in the effective tax rate from fiscal 2002 to fiscal 2003 resulted from the ceasing of goodwill and employee workforce amortization in fiscal 2003, which decreased the effective rate by approximately 3.5% points. This decrease was partially offset by the reduced relative impact of permanent tax differences. The change in effective tax rate to 30.7% from 29.4% for fiscal 2002 is principally related to the tax benefit of higher marginal rates applied to the fiscal 2001 special charge. The tax rate applied to special items was 37.5% and 33.0% for fiscal 2003 and fiscal 2001, respectively. NET INCOME AND EARNINGS PER SHARE The Company’s net income and diluted earnings per share for fiscal 2003, fiscal 2002, and fiscal 2001 are as follows: Dollar Amount Margin 2003 2002 2001 2003 2002 2001 Dollars in millions, except EPS Net income $440.2 $344.1 $233.2 3.9% 3.0% 2.2% Diluted earnings per share $ 2.54 $ 2.01 $ 1.37 The net earnings margin was 3.9% for fiscal 2003, 3.0% for fiscal 2002 and 2.2% for fiscal 2001. The improvement for fiscal 2003 was principally attributable to lower costs of services and selling, general and administrative expenses. During fiscal 2002, the Company’s net income margin increased to 3% from 2.2% for fiscal 2001 primarily due to the impact of the fiscal 2001 special items, partially offset by the fiscal 2002 increases in costs of services, depreciation and amortization and interest expense as described above. CASH FLOWS F i s c a l Ye a r 2003 2002 2001 Dollars in millions Net cash from operations $1,148.2 $1,305.4 $ 854.2 Net cash used in investing (994.0) (1,205.7) (2,243.4) Net cash (used in) provided by financing (20.2) (133.9) 1,321.5 Effect of exchange rate changes on cash and cash equivalents 16.5 (1.4) (8.0) Net increase (decrease) in cash and cash equivalents 150.5 (35.6) (75.7) Cash and cash equivalents at beginning of year 149.1 184.7 260.4 Cash and cash equivalents at end of year $ 299.6 $ 149.1 $ 184.7 Historically, the majority of the Company’s cash and cash equivalents has been provided from operating activities. During fiscal 2003, net cash provided from operations decreased primarily due to a reduction in payables and accrued expenses, net of acquired DynCorp balances, partially offset by additional net earnings and a lesser increase in accounts receivable. EXPERI E NC E. 16
  19. 19. COMPUTER SCIENCES CORPORATION The Company’s investments principally relate to purchases of computer equipment and software, facilities, and deferred outsourcing contract costs that support the Company’s expanding Global Commercial and U.S. Federal sector operations. Investments include computer equipment purchased at the inception of outsourcing contracts as well as subsequent upgrades, expansion or replacement of these client-supporting assets. The Company’s investments also include acquisitions accounted for under the purchase method of accounting, including significant amounts for the fiscal 2003 acquisition of DynCorp and the fiscal 2001 acquisition of Mynd. As described above, historically a majority of the Company’s capital investments have been funded by cash from operations. The Company issued 15 million shares during the fourth quarter of fiscal 2003 to partially fund the DynCorp acquisition. In addition, the Company issued $300 million of 5.00% notes due February 15, 2013. The funds were used for general corporate purposes, including reduction of outstanding commercial paper which had increased as a result of paying off assumed DynCorp debt and the cash portion of the DynCorp consideration. During fiscal 2002, the Company issued $500 million of 6.75% notes due June 2006 and $500 million of 7.375% notes due June 2011. The net proceeds were used for general corporate purposes, including the reduction of outstanding commercial paper. LIQUIDITY AND CAPITAL RESOURCES The balance of cash and cash equivalents was $299.6 million at March 28, 2003, $149.1 million at March 29, 2002 and $184.7 million at March 30, 2001. During this period, the Company’s earnings have added to equity. During fiscal 2003, foreign currency translation adjustment increased equity by $165.0 million while unfunded pension obligations decreased equity by $90.3 million. At the end of fiscal 2003, CSC’s ratio of debt to total capitalization was 35.0%. F i s c a l Ye a r 2003 2002 2001 Dollars in millions Debt $2,479.7 $2,204.1 $2,384.0 Equity 4,606.4 3,623.6 3,215.2 Total capitalization $7,086.1 $5,827.7 $5,599.2 Debt to total capitalization 35.0% 37.8% 42.6% At March 28, 2003, the Company had a commercial paper program, backed by two syndicated credit facilities, with a total capacity of $671.0 million. The credit facilities were comprised of a $321.0 million facility, which expires on August 18, 2005 and a $350.0 million facility, which expires August 15, 2003. At March 28, 2003, approximately $470.0 million was available for borrowing under this program compared to $497.8 million at the end of fiscal 2002. At March 28, 2003, the Company had $201.0 million borrowings under the commercial paper program and is in compliance with all terms of the agreements. In addition, the Company had uncommitted lines of credit of $511.1 million available with certain foreign banks. During fiscal 2003, the Company issued 15 million shares of common stock and $300 million worth of term debt from its fiscal 2002 shelf registration. R E S U LT S . 17
  20. 20. COMPUTER SCIENCES CORPORATION The following table summarizes the Company’s contractual obligations by period as of March 28, 2003: Less than 1-3 3-5 More than 1 year years years 5 years Total Dollars in millions Long term debt $ 701.0 $498.9 $ 993.3 $2,193.2 Capital lease obligations $ 22.2 8.2 1.9 32.3 Operating leases 331.5 423.7 222.9 234.2 1,212.3 Minimum purchase obligations 465.4 755.1 359.4 63.5 1,643.4 Other long-term liabilities 2.7 1.1 .4 .1 4.3 $821.8 $1,889.1 $1,083.5 $1,291.1 $5,085.5 Total Regarding minimum purchase obligations included above, the Company has signed long-term purchase agreements with certain software, hardware, telecommunication and other service providers to obtain favorable pricing, committed service levels and terms for services that are necessary for the operations of business activities. The Company is contractually committed to purchase specified service minimums over remaining periods ranging generally from 1 to 5 years. If the Company does not meet the specified service minimums, the Company would have an obligation to pay the service provider a portion or all of the shortfall. In the normal course of business, the Company may provide certain customers and potential customers with finan- cial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general, the Company would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which is remote in management’s opinion. The Company is in compliance with the performance obligations under all service contracts for which there is a performance guarantee, and any liability incurred in connection with these guarantees would not have a material adverse effect on the Company’s consolidated results of operations or financial position. In addition, the Company has other guarantees that represent parent guarantees in support of working capital uncommitted lines of credit established with local financial institutions for its foreign business units. Borrowings under these lines were $49.9 million at March 28, 2003. The following table summarizes the expiration of the Company’s financial guarantees outstanding as of March 28, 2003: F i s c a l Ye a r 2006 & 2004 2005 thereafter Total Dollars in millions Performance guarantees: Surety bonds $ 55.2 $ 3.0 $ 58.2 Letters of credit 16.2 $22.1 38.3 Other surety bonds 15.3 3.1 18.4 Standby letters of credit 61.1 61.1 Subsidiary debt guarantees 469.2 40.0 509.2 $617.0 $46.1 $22.1 $685.2 Total As of March 28, 2003, the amount of outstanding subsidiary debt under the subsidiary debt guarantees noted above was $49.9 million. EXPERI E NC E. 18
  21. 21. COMPUTER SCIENCES CORPORATION In the opinion of management, CSC will be able to meet its liquidity and cash needs for the foreseeable future through the combination of cash flows from operating activities, cash balances, unused borrowing capacity and other financing activities. If these resources need to be augmented, major additional cash requirements would likely be financed by the issuance of debt and/or equity securities and/or the exercise of the put option as described in Note 13 to the Company’s consolidated financial statements. The Company’s sources of debt include the issuance of commercial paper and short-term borrowings. If the Company were unable to sell commercial paper or if the Company determined it was too costly to do so, the Company has the ability to borrow under the two syndicated backstop credit facilities. DIVIDENDS AND REDEMPTION It has been the Company’s policy to invest earnings in the growth of the Company rather than distribute earnings as dividends. This policy, under which dividends have not been paid since fiscal 1969, is expected to continue, but is subject to regular review by the Board of Directors. CRITICAL ACCOUNTING POLICIES The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements under “Summary of Significant Accounting Policies.” The Company’s critical accounting policies related to revenue recognition include long-term contracts, outsourcing contracts, and software sales. The Company also has critical accounting policies addressing outsourcing contract costs, software development costs, and retirement benefits. Revenue recognition – Long-term contracts The Company provides services under time and materials, level of effort, cost-based, unit-price and fixed-price contracts. For time and materials and level of effort types of contracts, revenue is recorded when services are provided at agreed-upon billing rates. For cost-based contracts, revenue is recorded at the time such fees are probable and estimable by applying an estimated factor to costs as incurred, such factor being determined by the contract provisions and prior experience. Revenue is recognized on unit-price contracts based on unit metrics times the agreed upon contract unit price. Revenue on long-term, fixed-price development contracts is recognized on the basis of the estimated percentage-of-completion if the Company can dependably estimate and measure the extent of progress and the cost to complete. The Company applies this method of revenue recognition because projected contract revenues and costs are reasonably estimable based on the Company’s business practices, methods and historical experience. The method requires estimates of costs and profits over the entire term of the contract, includ- ing estimates of resources and costs necessary to complete performance. Management regularly reviews project profitability and underlying estimates. Revisions to the estimates at completion are reflected in results of operations as a change in accounting estimate in the period in which the facts that give rise to the revision become known by management. Provisions for estimated losses, if any, are recognized in the period in which the loss is determined. Revenue recognition – Outsourcing contracts Revenue on outsourcing contracts is recognized based on the services performed or information processed during the period in accordance with contract terms and the agreed-upon billing rates applied to the consumed service metrics. Revenue recognition – Software sales Revenue from sales of proprietary software are recognized upon receipt of a signed contract documenting customer commitment, delivery of the software and determination of the fee amount and its probable collection. However, if significant customization is required, revenue is recognized as the software customization services are performed in accordance with the percentage-of-completion method. Costs incurred in connection with sales of proprietary software are expensed as incurred, except for the costs of developing computer software products, which are capitalized and amortized over the life of the software products. R E S U LT S . 19
  22. 22. COMPUTER SCIENCES CORPORATION Outsourcing Contract Costs Costs on outsourcing contracts are generally expensed as incurred. However, certain costs incurred upon initiation of an outsourcing contract are deferred and expensed over the contract life. These costs consist of contract acquisition and transition costs, including the cost of due diligence activities after competitive selection and costs associated with installation of systems and processes. Costs incurred for bid and proposal activities are expensed as incurred. Fixed assets acquired in connection with outsourcing transactions are capitalized and depreciated consistent with fixed asset policies described in Note 1. Amounts paid to clients in excess of the fair market value of acquired property and equipment (premiums) are capitalized as outsourcing contract costs and amortized over the contract life. The amortization of such outsourcing contract cost premiums is accounted for as a reduction in revenue, as described in Note 1. Management regularly reviews outsourcing contract costs for impairment. Terminations of outsourcing contracts, including transfers either back to the client or to another I/T provider, prior to the end of their committed contract term are infrequent due to the complex transition of personnel, assets, methodologies, and processes involved with outsourcing transactions. In the event of an early termination, the Company and the client, pursuant to certain contractual provisions, engage in negotiations on the recovery of unamortized contract costs, lost profits, transfer of personnel, rights to implemented systems and processes, as well as other matters. Software Development Costs The Company capitalizes costs incurred to develop commercial software products after technological feasibility has been established. Costs incurred to establish technological feasibility are charged to expense as incurred. Enhance- ments to software products are capitalized where such enhancements extend the life or significantly expand the marketability of the products. Capitalized software is amortized based on current and estimated future revenue from the product. The amortization expense is not less than the straight-line amortization expense over the product useful life. The Company capitalizes costs incurred to develop internal-use computer software. Internal and external costs incurred in connection with development of upgrades or enhancements that result in additional functionality are also capitalized. These capitalized costs are amortized on a straight-line basis over the estimated useful life of the software. Purchased software is capitalized and amortized over the estimated useful life of the software. Retirement Benefits The Company offers a number of pension and postretirement healthcare and life insurance benefit plans. CSC utilizes actuarial methods required by SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” to account for pension and postretirement plans, respectively. The actuarial methods require significant assumptions to calculate the net periodic pension benefit expense and the related pension benefit obligation for our defined benefit pension plans. These assumptions include, but are not limited to, the expected long-term rate of return on plan assets and discount rates. In making these assumptions, we are required to consider current market conditions, including changes in interest rates. Changes in the related net periodic pension costs may occur in the future due to changes in these and other assumptions. The assumption for the expected long-term rate of return on plan assets is selected by taking into account the expected duration of the projected benefit obligation for the plans, the asset mix of the plans, historic plan asset returns as well as current market conditions and other factors. Our fiscal 2003 pension plan valuations utilized a weighted average expected long-term rate of return on plan assets of 8.1% compared to 8.4% used in fiscal 2002. Holding all other assumptions constant, a one-half percent increase or decrease in the assumed weighted average rate of return on plan assets would have decreased or increased, respectively, the net periodic pension cost by approximately $7 million. EXPERI E NC E. 20
  23. 23. COMPUTER SCIENCES CORPORATION The discount rate assumption reflects the market rate for high-quality, fixed income debt instruments based on the expected duration of the benefit payments for our pension plans as of our annual measurement date and is subject to change each year. Our fiscal 2003 pension plan valuations utilized a weighted average discount rate of 6.3% compared to 6.8% used in fiscal 2002. Holding all other assumptions constant, a one-half percent increase or decrease in the assumed weighted average discount rate would have decreased the net periodic pension cost by approximately $19 million or increased it by approximately $20 million, respectively. SFAS No. 87 requires recognition of a minimum pension obligation if the fair value of plan assets is less than the accumulated benefit obligation (ABO) at the end of the year. As of March 28, 2003, some of the Company’s pension plans had ABOs in excess of the fair value of their respective plan assets for which we recognized an additional minimum obligation resulting in an increase in intangible assets of $24.5 million and a charge to equity of $90.3 million, net of tax. Based on future plan asset performance and interest rates, additional charges to equity may be required. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill no longer be amortized when the new standard is adopted. The new standard also requires an initial goodwill impairment assessment in the year of adoption and annual impairment tests thereafter. The Company adopted SFAS No. 142 on March 30, 2002. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not consid- ered impaired, and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of the impairment loss, if any. During the second quarter ended September 27, 2002, the Company completed the initial good- will assessment and the annual goodwill impairment test. No impairment losses were identified as a result of these tests. In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses existing accounting impairment rules and broadens the presentation of discontinued opera- tions to include more disposal transactions. The Company adopted this statement on March 30, 2002. Adoption of this statement did not have a significant effect on the Company’s consolidated financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 clarifies guidance related to the classification of gains and losses from extinguishment of debt and resolves inconsistencies related to the required accounting for sale- leaseback transactions and the required accounting for certain lease modifications. The provision of SFAS No. 145 related to the extinguishment of debt will be effective for the Company on March 29, 2003. The provision of SFAS No. 145 related to the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications was effective for all transactions occurring after May 15, 2002. Adoption of this statement did not have a significant effect on the Company’s consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by the Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and was effective for the Company for exit or disposal activities initiated after December 31, 2002. The adoption of this statement impacted the accounting of exit and disposal activities related to the acquisition of DynCorp as discussed in the caption “Special Items” above. Additionally, this statement could impact the accounting for future exit or disposal activities. R E S U LT S . 21
  24. 24. COMPUTER SCIENCES CORPORATION In November 2002 and May 2003, the EITF reached a consensus on Issue 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF Issue 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance also addresses methods of measuring and allocating arrange- ment consideration to separate units of accounting. The guidance will be effective for revenue arrangements entered into after June 15, 2003. The Company presently intends to adopt this statement prospectively and the Company does not anticipate a material impact to the Company’s financial condition or results of operation as a result of adoption. In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others.” The interpretation requires disclosure about the nature and terms of obligations under certain guarantees that the Company has issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. The initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this interpretation are effective immediately. Adoption of this interpretation did not have a significant effect on the Company’s consolidated financial position or results of operations. In November 2002, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” The interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. This interpretation applies immediately to variable interest entities created after January 31, 2003 and variable interest entities in which the Company obtains an interest after January 31, 2003. For variable interest entities in which a company obtained an interest before February 1, 2003, the interpretation applies to the interim period beginning after June 15, 2003. Adoption of this interpretation did not have a significant effect on the Company’s consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure – an amendment of FASB Statement No. 123.” SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The statement will be effective for the Company’s fiscal 2004 and adoption of this statement is not expected to have a significant effect on the Company’s consolidated financial position or results of operations as the Company will continue to account for stock based compensation as described in Note 1. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003. Adoption of this statement is not expected to have a significant effect on the Company’s consolidated financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. Adoption of this statement is not expected to have a significant effect on the Company’s consolidated financial position or results of operations. EXPERI E NC E. 22
  25. 25. COMPUTER SCIENCES CORPORATION In May 2003, the EITF reached a consensus on Issue No. 01-08, “Determining Whether an Arrangement Contains a Lease.” EITF Issue No. 01-08 provides guidance on how to determine whether an arrangement contains a lease that is within the scope of FASB Statement No. 13, “Accounting for Leases.” The guidance in Issue No. 01-08 is based on whether the arrangement conveys to the purchaser (lessee) the right to use a specific asset. The Issue 01-08 will be effective for arrangements entered into or modified in the Company’s second quarter of fiscal 2004. The Company is currently evaluating EITF Issue No. 01-08 and has not determined the impact this statement will have on its consolidated financial position or results of operations. FORWARD-LOOKING STATEMENTS All statements and assumptions contained in this annual report and in the documents attached or incorporated by reference that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements represent current expectations and beliefs of CSC, and no assurance can be given that the results described in such statements will be achieved. Forward-looking information contained in these statements include, among other things, statements as to the impact of the proposed merger with DynCorp and other statements with respect to CSC’s financial condition, results of operations, cash flows, business strategies, operating efficiencies or synergies, competitive positions, growth opportunities, plans and objectives of management, and other matters. Such statements are subject to numerous assumptions, risks, uncertainties and other factors, many of which are outside of CSC’s control, that could cause actual results to differ materially from the results described in such statements. These factors include, without limitation, the following: (i) changes in the Global Commercial demand for informa- tion technology outsourcing, business process outsourcing and consulting and systems integration services; (ii) changes in U.S. federal government spending levels for information technology and other services; (iii) competitive pressures; (iv) the credit worthiness of the Company’s commercial customers; (v) the Company’s ability to recover its accounts receivable; (vi) the Company’s ability to recover its capital investment in outsourcing contracts; (vii) the Company’s ability to continue to develop and expand its service offerings to address emerging business demands and technological trends; (viii) the future profitability of the Company’s long-term contracts with customers; (ix) the future profitability of the Company’s fixed-price contracts; (x) the Company’s ability to consummate and integrate acquisi- tions and form alliances; (xi) the Company’s ability to attract and retain qualified personnel; (xii) early termination of client contracts; and (xiii) general economic conditions and fluctuations in currency exchange rates in countries in which the Company does business. These factors also include the following risks specifically related to the merger with DynCorp: (i) the risk that the CSC and DynCorp businesses will not be integrated successfully; (ii) the risk that the expected benefits of the proposed merger may not be realized; (iii) the risk that resales of CSC stock following the merger may cause the market price to fall; and (vi) CSC’s increased indebtedness after the merger. Forward-looking statements in this Form 10-K speak only as of the date of this Form 10-K, and forward-looking statement in documents attached or incorporated by reference speak only as to the date of those documents. CSC does not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events, except as required by law. R E S U LT S . 23
  26. 26. COMPUTER SCIENCES CORPORATION MARKET RISK Interest Rates The Company has fixed-rate long-term debt obligations, short-term commercial paper and other borrowings subject to market risk from changes in interest rates. Sensitivity analysis is one technique used to measure the impact of changes in interest rates on the value of market-risk sensitive financial instruments. A hypothetical 10% movement in interest rates would not have a material impact on the Company’s future earnings or cash flows. Foreign Currency During the ordinary course of business, the Company enters into certain contracts denominated in foreign currency. Potential foreign currency exposures arising from these contracts are analyzed during the contract bidding process. The Company generally manages these transactions by ensuring costs to service contracts are incurred in the same currency in which revenue is received. Short-term contract financing requirements are met by borrowing in the same currency. By matching revenues, costs and borrowings to the same currency, the Company has been able to substan- tially mitigate foreign currency risk to earnings. If necessary, the Company may also use foreign currency forward contracts or options to hedge exposures arising from these transactions. The Company does not foresee changing its foreign currency exposure management strategy. During fiscal 2003, 36.5% of the Company’s revenue was generated outside of the United States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S. dollar against all currencies would decrease revenue by 3.65% or $414.0 million, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenue by 3.65% or $414.0 million. In the opinion of management, a substantial portion of this fluctuation would be offset by expenses incurred in local currency. As a result, a hypothetical 10% movement of the value of the U.S. dollar against all currencies in either direction would impact the Company’s earnings before interest and taxes by $27.9 million. This amount would be offset, in part, from the impacts of local income taxes and local currency interest expense. At March 28, 2003, the Company had approximately $193.7 million of non-U.S. dollar denominated cash and cash equivalents, and approximately $51.0 million of non-U.S. dollar borrowings. EXPERI E NC E. 24
  27. 27. CONSOLIDATED STATEMENTS OF INCOME COMPUTER SCIENCES CORPORATION F i s c a l Ye a r E n d e d March 28, 2003 March 29, 2002 March 30, 2001 Dollars in millions except per-share amounts Revenues $11,346.5 $11,379.2 $10,492.9 Costs of services 9,068.2 9,187.2 8,406.8 Selling, general and administrative 716.9 741.9 814.9 Depreciation and amortization 810.3 810.8 618.2 Interest expense 142.8 154.8 106.1 Interest income (8.5) (12.3) (16.3) Special items (note 4) 5.2 232.9 Total costs and expenses 10,734.9 10,882.4 10,162.6 Income before taxes 611.6 496.8 330.3 Taxes on income (note 5) 171.4 152.7 97.1 Net income $ 440.2 $ 344.1 $ 233.2 Earnings per common share: Basic $ 2.55 $ 2.02 $ 1.39 Diluted $ 2.54 $ 2.01 $ 1.37 (See notes to consolidated financial statements) R E S U LT S . 25
  28. 28. CONSOLIDATED BALANCE SHEETS COMPUTER SCIENCES CORPORATION March 28, 2003 March 29, 2002 Dollars in millions Assets Current assets: Cash and cash equivalents $ 299.6 $ 149.1 Receivables, net of allowance for doubtful accounts of $71.8 (2003) and $74.6 (2002) (note 6) 3,320.2 2,753.9 Prepaid expenses and other current assets 468.3 401.2 Total current assets 4,088.1 3,304.2 Investments and other assets: Software, net of accumulated amortization of $427.1 (2003) and $336.4 (2002) 355.6 375.6 Outsourcing contract costs, net of accumulated amortization of $579.5 (2003) and $388.1 (2002) 923.5 992.2 Excess of cost of businesses acquired over related net assets, net of accumulated amortization of $308.7 (2003) and $285.6 (2002) 2,507.3 1,641.0 Other assets (note 5 and 8) 571.1 389.5 Total investments and other assets 4,357.5 3,398.3 Property and equipment at cost (note 7): Land, buildings and leasehold improvements 827.8 712.7 Computers and related equipment 2,980.7 2,880.8 Furniture and other equipment 363.7 290.9 4,172.2 3,884.4 Less accumulated depreciation and amortization 2,184.6 1,976.4 Property and equipment, net 1,987.6 1,908.0 $10,433.2 $8,610.5 (See notes to consolidated financial statements) EXPERI E NC E. 26
  29. 29. COMPUTER SCIENCES CORPORATION CONSOLIDATED BALANCE SHEETS March 28, 2003 March 29, 2002 Dollars in millions except shares Liabilities and Stockholders’ Equity Current liabilities: Short-term debt and current maturities of long-term debt (note 7) $ 274.8 $ 331.0 Accounts payable 643.2 530.4 Accrued payroll and related costs 638.8 541.5 Other accrued expenses 990.0 876.9 Deferred revenue 222.6 284.2 Federal, state and foreign income taxes (note 5) 217.8 144.0 Total current liabilities 2,987.2 2,708.0 Long-term debt, net of current maturities (note 7) 2,204.9 1,873.1 Other long-term liabilities (note 8) 634.7 405.8 Commitments and contingencies (note 9) Stockholders’ equity (notes 7, 10 and 11): Preferred stock, par value $1 per share; authorized 1,000,000 shares; none issued Common stock, par value $1 per share; authorized 750,000,000 shares; issued 187,206,632 (2003) and 171,571,591 (2002) 187.2 171.6 Additional paid-in capital 1,502.2 1,047.6 Earnings retained for use in business 3,078.5 2,638.3 Accumulated other comprehensive loss (142.5) (215.4) 4,625.4 3,642.1 Less common stock in treasury, at cost, 449,249 shares (2003) and 433,754 shares (2002) (19.0) (18.5) Stockholders’ equity, net 4,606.4 3,623.6 $10,433.2 $8,610.5 (See notes to consolidated financial statements) R E S U LT S . 27

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